Posted on 10/11/2009 3:21:34 AM PDT by TigerLikesRooster
In the Eye of the Commercial Real-Estate Hurricane
The Federal Reserve is worried that banks are slow to recognize commercial real-estate losses and is warning that the financial system may be headed for a new wave of painful write downs.
Wait a minute. The last time Deal Journal checked with some analysts about the big banks’ real estate exposure they said the situation was improving. Here is Barclays’ takeaway from its banking conference last month. “Following commentary from our financial services conference, we believe commercial real estate prices may have bottomed for the time being, resulting in no meaningful markdown” of assets in the third quarter,’’ wrote Barclays banking analyst Roger Freeman on Sept. 18.
(Excerpt) Read more at blogs.wsj.com ...
Ping!
If you listen to Gerald Celente, who happens to have an excellent track record of looking way ahead, he will tell you that “You ain’t seen nothing yet”.
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Not only will the banks be holding interim construction loans without any take-outs because there are no tenants in these “spec” buildings to pay the mortgage, but
I believe there will be many large institution lenders and pension funds who bought buildings 10 years ago and either the loans are coming due as a balloon and the borrowers now have no tenants to generate cash flow to pay the mortgage so they will just walk. The Pension Funds will have no cash generated because the buildings they bought 10 years ago have emptied out due to the recession so won't have cash to fund to their members.
The “Lawyers” came up with LLC’s, PC’s and a number of vehicles which required no personal guarantees like in the “good old days” so the borrowers will just walk from their loan commitments and keep their homes, big cars, fancy vacation homes,etc.
If the Government thought the past bailout was the end, it was just the beginning of a disaster to our financial problems.
JMHO
“The developers will file bankruptcy. The Banks will be stuck with unusable/sell-able commercial property. “
Agree also. This country simply has way too many square feet of both residential and office space to accommodate its new standard of living. We are built out for a wealthy, thriving, First World country, yet we are headed for Third World status. The bottom line is that when people don’t have the money, they will not shop...and when people cannot afford the energy needed to heat and cool their houses, they will live in apartments and/or double up. Look out the window, take some pictures, and show your grandchildren what a great country you had...until a bunch of greedy, selfish, people took power and destroyed it (and the people who knew better felt it more important to purify their party, then to protect us from these people).
Balloon payments are a stupid concept—as we all are about to learn. They were based on the absurd assumption that refinancing would be a sure thing when the future day came.
Well, the future is about to be now and the balloon is about to make a very loud noise.
“Balloon payments are a stupid concept”
as opposed to what? Loaning money forever?
What would you propose as an alternative?
The commercial real estate venture loans should amortize over the life of the asset—if that is a short period of time then so be it.
The bubble economy (tomorrow will take care of itself) approach was destined to fail.
Your proposal would increase risk and interest rates for such loans
RIGHT, the loan officers were booking performance bonuses and now the buildings are empty and not worthy of refinance.
Unfortunately, they never thought about a recession this deep. They had money they “had” to get out and the balloons had worked before. As a matter of fact, they made the balloon balances to be lower than the replacement costs.
So we got a situation where no one wants to invest in the “see-throughs” no matter what the square footage cost might be. You still got real estate taxes, insurance, maintenance and management fees to pay. Then you got the real estate agents who try to stick you with gigantic “commissions” and then the cost of retrofit, which in an office building you are talking $60.00/SF+. Tenants then want to negotiate for free rent, moving cost covered, communication systems included and all other kinds of “goodies”.
My husband and I have been through these ups and downs and luckily after 40 years in the business got out and just in time! We can sleep at night, have what we need to live a happy life and enjoy our life in the USA as we know it today.
My prayers go out to those who have thought the market would turn in 18 months but has only gone from bad to worse. It will be quite an adjustment for some of the high rollers in both the development and banking industry.
And worse yet, us taxpayers will pay for this fiasco. JMHO.
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